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Health cost crisis – Pacific Research Institute

Health cost crisis

While campaigning across the country promoting a federal government takeover of access to medical services, President Barack Obama has repeatedly denounced rising health costs, which he claims are bankrupting families and businesses. He did so again Wednesday night in his speech to a joint session of Congress.

The president’s assertions seem plausible. Last year, 16 percent of America’s gross domestic product was dedicated to health care. That’s more than double what we spent as a nation in 1970. Nineteen percent of personal consumption spending in 2008 was on health goods and services — a 13-percentage-point increase over the past 50 years.

But historical data on how we spend our money reveal that rising health-care costs are far from ruining our personal finances.

Non-health-care personal consumption spending has increased faster than personal consumption spending on health care in recent years. Between 1995 and 2008, per-person spending on health goods and services increased from $4,601 to $5,716 in 2005 dollars — a 23 percent jump. But during the same period, spending on non-health-care goods and services increased from $18,745 to $24,886 — a 33 percent jump.

What’s that mean? For one, Americans have gained a great deal of purchasing power. Consumption of non-health goods and services grew more than $6,000 per person and about $16,000 per household during that 13-year period.

In addition, about 85 percent of every American’s increase in personal consumption went to something other than health care. Our spending on movies, travel, and other consumer goods grew even faster than the supposedly debilitating increase in health costs.

Put another way, the innovation and competition that have brought lower prices, greater choice, and better quality outside the health-care system have made it easier for us to bear increasing health care costs.

Americans are also coping with rising health costs much better than people in countries with government-dominated health care systems. In 2005, U.S. per-capita GDP was about $5,000 higher than in Canada or Great Britain and about $8,000 higher than in Germany or France — even after subtracting health spending.

Would-be health reformers in this country have painted an alternative narrative, of families trying to decide whether to go to the doctor or pay rent. It’s a powerful image, but it’s ignorant of the facts. And the government-heavy reforms these fear-mongers are pushing would only exacerbate the increasing costs in our health sector.

In fact, one of the reasons health-care spending has increased to one-fifth of personal consumption expenditures is that so much of it is not controlled by “we, the people.” Instead, government gives our employers monopoly power over the pre-tax dollars used to buy health benefits, while government’s appetite for tax dollars to fund its own expensive health programs is insatiable. As a result, the average household spends only 4.5 percent of its pre-tax income, or 5.7 percent of household expenditures, on health care of its own choice, with the government laundering the rest through third parties.

Further, costs for Medicare and Medicaid are spiraling out of control. Since 1970, Medicare’s spending per patient has risen a third more than private spending on health goods and services. Medicaid spending per patient has increased 35 percent more than private spending. That’s equivalent to $119 billion worth of inefficiencies in the last year alone. Why would we possibly extend that kind of fiscal mismanagement to the entire country, via a so-called “public option?”

Rising health costs are a natural consequence of our health system’s reliance on third-party payment. We tend to consume more of a good or service when we pretend that someone else is footing the bill. By insulating patients from the true cost of their medical services, public and private insurance programs alike encourage over-consumption, waste, and fraud.

The answer to controlling health costs is not more government control, but less. Returning health care dollars and decisions to individual patients will encourage them to make more prudent decisions, spur competition in the health-care marketplace, and bring down overall costs.

Health reform is certainly needed. But politicians’ fear-mongering about the costs of the current system isn’t justified by the data. Creating a massive new federal bureaucracy that will fail to hold down health costs will have a deleterious effect on both the physical health of patients and the financial health of taxpayers.

John R. Graham is director of health care studies at the Pacific Research Institute.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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